1099C - Debt Cancellation

[Single Dad]

Client's Bankruptcy was final in March 2006. Bank takes until September to Foreclose.

Debt is cancelled as of 12/10/2006, bank send's 1099C showing the debt cancellation, and another form showing they abandoned the property.

Interestly enough they get a refund if we don't consider the debt cancelled, and owe a bunch if we do.

My head is spinning on this one, anyone have some input?

Regards,

Single Dad

[Cathy]

My head is spinning also, so I will not respond directly but post something from irs.gov that hopefully will help you!

Can COD income ever be excluded from my gross income?

You may be able to exclude all or part of the cancelled debt income if all or part of the debt was discharged in bankruptcy, if you were insolvent immediately before the transfer, or if the debt is a qualified farm debt or qualified real property indebtedness. Refer to Publication 908 (PDF),Bankruptcy Tax Guide.

[LindaB]

The foreclosure is reported as a sale, and there could be capital gain or loss. The COD is not taxable if the debt was discharged in bankruptcy.

[Single Dad]

The foreclosure is reported as a sale, and there could be capital gain or loss. The COD is not taxable if the debt was discharged in bankruptcy.

Thank You for the help

[LindaB]

Are you sure the foreclosure (house I assume) was part of the bankruptcy? If it wasn't part of the bankruptcy, any COD from the foreclosure could probably still be excluded if the client was insolvent.

Take a look at this article from IRS, it explains foreclosure/gain or loss/cancellation of debt very well. (Skip the first part, it's about state tax refunds)

http://www.irs.gov/faqs/faq4-4.html